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A futures contract is an agreement between two parties to buy or sell an underlying asset at a future date for a specific price. Futures contracts are used by two groups of market participants hedgers and speculators. Speculation is trying to make a profit from a security price change while hedging is a way of reducing risk one type of risk is basic risk. This is the spot price of the asset to be hedged - future prices of contract used. In the United states the type of crude oil produced is the Light sweet crude oil and if people desire to invest in this oil they tend to buy the front month contract, which is the next contract to expire, on West Texas Intermediate crude oil futures. These futures contracts are traded on the Chicago Mercantile Exchange where a clearing house member would take the opposite side of the contract. Investors typically use the front month contract, which in this case is WTI Crude oil futures for May, to trade oil due to it being the most liquid and thus the easiest to buy and sell. Also, due to convergence, the futures price tends to be near physical spot price of of WTI Crude oil thus making it a better option for investors. It should also be noted that the price of the front month contract is what is displayed to investors and by news outlets as the "price of oil" but it is not th physical price of the oil. The WTI front month contract for May delivery closed at $37.63 a barrel, a one-day drop of $55.90, or 306%, according to Dow Jones Market Data. The contract which expired on Tuesday 21st April fuelled many problems for traders. The derivative market facilitated this process firstly with traders with long future positions scrambling to get out amid a fear that it would be difficult to find a place to park physical oil amid a rising glut of crude. The pressure caused by selling the futures contracts caused price to go into negative zone. This entailed that the seller had to pay money for the buyer to take the oil off their hands. This may sound like a great deal but if the delivery is taken, then the buyer would have to spend money on storing thousands of barraels of crude oil, which is worth close to nothing hence the reason why they are receiving funds to take the contract that's results in delivery. What happened is very unique as storage cost increased while the cost of crude oil decreased significantly. This caused for an inaccurate reflection of supply and demand fundamentals Type here to search